Broadband Battle

A Supreme Court ruling is the latest twist in a fight over the ability of public utilities to provide telecom services.

The public utility in Glasgow, Ky., began delivering cable TV service via municipally owned network infrastructure in 1989, after community members complained about their cable company.

At the time, the existing cable company offered the 15,000-person community 24 channels of programming for $14.25 per month. Facing competition from the Glasgow Electric Plant Board (EPB), the company dropped its monthly fee to $5.95 for 45 channels, said EPB Superintendent William Ray.

The EPB introduced broadband Internet services a few years later -- charging residential customers $25.90 per month for T1 speeds -- and recently unveiled digital cable and HDTV.

Glasgow's decision to build a municipally owned broadband network made city residents among Kentucky's first to enjoy widespread broadband availability, according to Ray. Thirty other Kentucky communities followed Glasgow's lead.

Across the nation, approximately 570 publicly owned electric utilities offered some kind of community broadband services at the end of 2003, up from 511 reported in 2002, according to a survey conducted by the American Public Power Association (APPA) of its members.

But a recent U.S. Supreme Court decision may slam the brakes on that activity. In a Missouri case ruling, the court upheld states' power to stop municipally owned utilities from entering the broadband market. Ray and others worry the decision will trigger waves of state legislation barring municipal utilities from offering cable and telecommunications services.

"We've got to assume this is the precursor to new laws being introduced," said Ray, adding that several states already have laws on the books prohibiting municipalities from offering telecom services. "In those states, I think the battle is over. Now it really gets into political will and your individual risk aversion situation."

Bad Investment?

Opponents of the practice say it's about time states clamped down. Utilities may view their entry into these markets as bringing needed resources to underserved communities, but detractors see unfair competition. They say utilities -- as quasi-governmental entities -- have no place in the market, standing toe-to-toe with private companies.

"You have a couple of problems," said Thomas Lenard, senior fellow and vice president of research for the Progress & Freedom Foundation (PFF). "One is that typically these are losing propositions for taxpayers of the locality. The taxpayers of the municipality are being forced to make a very bad investment in terms of their taxpayer dollars.

"These are goods and services that are typically provided by the private sector," he said. "One of the reasons these are losing propositions for these localities is they are in head-to-head competition with private telephone and cable companies. This is a very competitive business. It's a low margin and high fixed-cost business. The private companies in it, many are having trouble surviving."

Government Entry Into the Telecom Business: Are the Benefits Commensurate With the Costs?, a research report co-authored by Lenard released in February as part of the PFF's "Progress on Point" series of policy reports, studies three municipalities and determined that the benefits of each municipality's entry into the telecom market didn't offset the costs.

No municipal telecom entrants are covering their variable costs, Lenard said in his report, and the municipal entrants are subsidized by the towns' residents -- subsidies amounting to anywhere from $350 to more than $1,000 per customer, excluding capital costs.

"Citizens are paying through the back door, through higher taxes or higher electricity bills," he said.